A court battle over $15.5-million paid to former directors and officers of Look Communications Inc. as they sold off the struggling firm's assets could have broad implications for directors in Corporate Canada.
A seat on a corporate board usually comes with a guarantee that the company will cover any legal fees that arise. The issue at stake in the Look case, however, is whether a company that is suing its former directors for allegedly acting against its interests should still be forced to cover those ex-directors' legal expenses up front.
The case is being watched closely on Bay Street as the outcome could rewrite the rules governing when directors should have their legal bills paid up front. If it turns out that future directors of public companies could face large legal bills after they lose their board seats, some observers argue that many may think twice before signing on.
"If we want to encourage good men and women to sit on boards of public companies, and I think we do, this case is going to have far-reaching implications to the willingness of business people to go on boards," said lawyer Joe Groia, who is acting for Gerald McGoey, a former chief executive officer and board vice-chairman for Look.
Lawyers for a group of Look's former directors and officers went before the Ontario Court of Appeal last week to challenge a lower court ruling that denied all but one of them the right to have their legal fees in the dispute paid in advance by the company, which is suing them for allegedly breaching their fiduciary duty as directors.
The former directors of Look – once an upstart wireless TV and Internet service provider – deny the allegations against them. They argue that the payments, which include cheques for consultants and others, and totalled about $20-million, were reasonable, coming after the hollowed-out company arranged to sell its wireless spectrum for $80-million to a partnership of Bell and Rogers in 2009.
In court documents, Look alleges the payments were initially not properly disclosed. After disclosing the payments, according to court documents, the board sent $1.5-million of Look's money to three law firms to prepare for lawsuits from shareholders, and then resigned. Look's new board and management, installed after a proxy fight at Look's biggest shareholder, investigated and launched lawsuits. A lawyer for Look declined to comment.
Last fall, Justice Laurence Pattillo ruled that the company had established what appeared to be a strong case that the former directors had allegedly acted "in their own self interests and not with a view to the interests of Look."
But Justice Pattillo cautioned that his ruling was not a final determination in the case. If the former directors won at trial, they would have their legal fees paid.
The rare decision raised eyebrows on Bay Street, as it appeared to establish a new test for when a director deserves to have legal fees covered up front. It also contradicted another Ontario Superior Court ruling, in a related battle between one of the former board members and Look's largest shareholder, which ordered that ex-director's legal fees covered up front.
Laura Fric, a litigator with Osler Hoskin & Harcourt LLP who is not involved in the case but has been watching it closely, said the lower court ruling was an attempt to balance the conflicting issues in the dispute.
"On the one hand, it's in the interest of business and the public to have capable, qualified people act as directors," she said in an interview. "On the other hand …there are rare times when directors line their own pockets at the expense of companies and their shareholders. And in those circumstances, we have to have effective remedies for the companies and their shareholders to get that money back. It is a balancing act."
Mr. Groia argues that U.S. courts in Delaware, which have handled many disputes of this kind before, have ruled that directors should have their costs covered up front – even in cases in which they are alleged to have acted in bad faith.